Should a Home count in asset allocation?

**disneysteve** · 02-11-2014, 05:43 AM

I vote no. Your primary residence isn't an investment. You didn't buy it to make money. You bought it to have a place to live.

**feh** · 02-11-2014, 06:22 AM

This question arises fairly often on bogleheads.org. I think the majority of people tend to say your residence should not be included in your AA.

There may be exceptions...such as if you are positive you will be selling the home at a future date. Even in that case, you need to be careful about assessing the value of the house, and taking into consideration that its value is not liquid.

**MonkeyMama** · 02-11-2014, 06:49 AM

Living in a high cost area, I would absolutely include value of personal residence. It would probably be ridiculous for us to *ever* invest in real estate, as we have that part well covered with our personal residence.

But, I admit I live in a unique area. I just think it should be factored. If you don't live in such a crazy or unique area, your real estate won't already be 50% or 90% of your net worth. So it won't matter much to your decision, probably.

**feh** · 02-11-2014, 07:00 AM

Originally posted by MonkeyMama View Post

Living in a high cost area, I would absolutely include value of personal residence. It would probably be ridiculous for us to *ever* invest in real estate, as we have that part well covered with our personal residence.

But, I admit I live in a unique area. I just think it should be factored. If you don't live in such a crazy or unique area, your real estate won't already be 50% or 90% of your net worth. So it won't matter much to your decision, probably.

To be clear, the OP was asking if home equity should be included in their asset allocation, not their net worth.

**MonkeyMama** · 02-11-2014, 07:14 AM

Originally posted by feh View Post

To be clear, the OP was asking if home equity should be included in their asset allocation, not their net worth.

I understand, but it goes hand in hand. If you are very heavy in real estate, in general, you should probably factor that in your asset allocation.

**feh** · 02-11-2014, 07:24 AM

Originally posted by MonkeyMama View Post

I understand, but it goes hand in hand. If you are very heavy in real estate, in general, you should probably factor that in your asset allocation.

Could you explain why? I don't see why home equity should be included in AA in expensive real estate markets, but not others.

**kork13** · 02-11-2014, 07:59 AM

I'm mostly in agreement with the others, but for one minor exception... Your primary home probably should not be considered am investment asset--it serves a different purpose than that (place to live). However, if you also own a rental property, that equity could be looked at as part of your investment asset allocation. The thing to keep in mind is that with a house, that equity can quickly overcome other investment types. So for example, when we get married, my GF's house will become a rental property for us. But with $20k equity in the home, that would/will dominate my taxable portfolio of only $55k. So just remember that your asset allocation will look different, & likely weighted heavily toward real estate if you do choose to include a rental in your asset allocation.

**jIM_Ohio** · 02-11-2014, 08:25 AM

I'd say yes
I'd also say it does not matter if we are discussing bond funds or REITs.

Check your bond funds- do they hold real estate notes (mortgage backed securities)?

If you have a mortgage, holding bond funds should be less. Once house is paid off, consider adding more bonds to portfolio. More than likely this will reach a tipping point (meaning a paid for house may trigger retirement options/ more conservative thinking). I have a paid for house and invest much more conservatively than I used to. 4 years isn't enough to justify a 20% higher position in bonds (80-20 to 60-40), but the paid for house made me see things very differently.

Some high yield bond funds might rely on real estate notes to boost return.
Some government bond funds might rely on same real estate notes to boost return.

**Petunia 100** · 02-11-2014, 02:27 PM

Originally posted by FirstTimer90 View Post

If a person was considering using Real Estate (REITs, rental, land ownership, etc) as part of their asset allocation, should they include the equity of home they live in when factoring in percentages?

How would you rebalance? If stocks have a good year, will you sell stocks and use the money to build an addition on your home? Or perhaps to pay down the mortgage? If stocks have a bad year, will you borrow against your home and buy more stocks?

**cardtrick** · 02-11-2014, 03:56 PM

It's just a less liquid asset with high transaction costs and no divisibility. It should be included in your net worth but not in your AA because of the the high transaction costs and lack of divisibility.

**scfr** · 02-11-2014, 05:08 PM

It is not uncommon for business owners to own less stock than the average investor. In a way, the money they have invested in their business, or at risk due to their business activities, is a form of "stock" in their minds even if there is are no formal stock shares or dividends or capital gains.

Similarly, someone who has a high percentage of their net worth in their home equity may decide that they already have plenty of exposure to real estate and as a result may decide to not invest in a REIT. That is a reasonable way of thinking.

I know I'm in the minority, but I think it is very reasonable to think about what percentage of your net worth is in your home equity. (Or alternatively, what percentage of your net worth is composed of non-financial assets such as home & car.) Certainly it's not something you are going to think about monthly, and of course you are not going to re-balance by making an addition to your home, but why not think about it at major milestones such as purchasing a home, retiring, etc. Why? To insure that you are not at risk of being house (or house/car) poor. There is no "rule of thumb" or conventional wisdom regarding this so it makes some people uncomfortable or they just can't fathom it, but for me it's important. My goal used to be to not have more than 15% of my net worth in my paid-for house at retirement. I've become a bit more ambitious. Now my goal is to have LESS than 15% of my net worth in my non-financial assets (house & cars combined) when I retire.

As far as whether or not a home is an investment, for some people it is just a place to live. For me, when I bought my home, I ranked houses with a list of criteria. Although "Expected Investment Value" was only one of many criteria, it still made the list. I was willing to trade of some gizmos like a media room for a neighborhood that I expected would remain a desirable place to live and thus maintain or increase in value. I also maintain my home in part so that it will hold its value. When/if I make improvements, they will be primarily for my quality of life but I would certainly consider resale when making decisions. I am not trying to make a killing on my home. But I do hope & expect that the value of my home will keep pace with inflation, sort-of. As another poster pointed out, transaction costs related to a home purchase are high and that makes it not exactly a 5-star investment. As soon as I bought my house I shaved 8% off of the purchase price before adding it to my net worth statement. The 8% will cover the eventual real estate commission, fees, and pre-sale costs. After that, I have adjusted the value by CPI-U. As a result, 5 years later the current value of my home on my net worth statement is exactly the purchase price, so in a way I'm back to square zero.

As I said, not a super investment, but personally I can't fathom making a purchase that large without at least considering the eventual resale value.

But I think Jim Ohio has an excellent point! This way of thinking may be more common among folks who own their home outright.

**scfr** · 02-11-2014, 05:25 PM

Originally posted by jIM_Ohio View Post

Check your bond funds- do they hold real estate notes (mortgage backed securities)?

Interesting point. And stable value funds may have money in real estate (mortgages), but how would one know given their utter lack of transparency?

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**danielhermann** · 02-12-2014, 06:32 AM

I think you should include your property in the list of your investments. This is because you can always enter into reverse mortgage and draw funds against your home. It helps you in not becoming financially dependent on anyone.

**jIM_Ohio** · 02-12-2014, 11:07 AM

This comes down to goal setting... if I know the goals of the person, I could answer the original question much better.

Is the goal to have the highest networth possible?
Is the goal to have an income stream at retirement?
Is the goal to maximize liquid savings?

Is retirement very specific (meaning there is something you want to do)
Is retirement when you stop working entirely?
Is retirement when you don't need to work?

If the goal is an income stream, real estate can enable that.
If the goal is a high networth, the leverage from a mortgage can enable that
If the goal is liquidity, real estate would not be realistic
If the goal was you have a specific thing to do, a paid for house might make sense, or even not having a house might make sense too

Without a clearly stated goal, answering the question is analyzing the bark on the tree and not seeing the forest or the trees around it.

Should a Home count in asset allocation?